The market has had a great start to 2012 with Europe and its problems off the front page of the world's newspapers at least for now. Traders have sent the market higher, despite halting talks with private lenders of Greek debt on the "haircuts" they should accept and warnings from the head of the International Monetary Fund (IMF). Last week, Christine Lagarde, the head of the IMF, warned that Europe needs to do more to promote growth before the crisis spreads to the world economy.

Portugal is the latest euro zone country to become a warning flag for investors as it looks likely that it will need a second bailout. The current plan was for Portugal to tap the international debt market sometime in 2013, but increasingly that possibility is looking highly unlikely. The country's 10-year government bond carries a nosebleed yield of 15% and that is rising as the economy is headed toward a free fall. This has only increased the speculation that Portugal will need a second bailout from the European Union, making a mockery out of the euro zone leaders' assurance that a second Greek bailout was a special case.

But that hasn't spooked traders this year, with a decent slew of earnings and job numbers helping to propel the benchmark S&P 500 stock index to a rally of 4.67% this year. This strong performance for equities contrasts with what is an increasingly gloomy macroeconomic backdrop globally.

Investors' faith in markets might get a further shock, if Japan becomes the next shoe to drop in the global debt crisis. Last week, Japan announced that the country had recorded its first annual trade deficit since 1980. A strong yen and weak global demand has caused one of the world's greatest export engines to run out of steam. This weakening in Japan's trade balance comes at a time when the country's aging population and decades of next-to-zero economic growth has begun to erode the stockpiles of cash that thrifty Japanese socked away when the economy was booming.

This is stoking fears that Japan will sooner or later have trouble financing its roughly ¥1,000 trillion in public debt. This debt is more than twice the size of Japan's economy, which is suffering from growth rates of close to zero. Japan has the worst demographic profile of any major country and is sorely in need of an obstetrician if it hopes to reverse its economic slide. But with its runaway welfare spending, Japan shows little prospect of digging itself out of its deep debt hole. Even the most optimistic economic scenarios show the country's debts growing for at least 12 more years. And while Greece is struggling to slash its deficit to 2.8% of GDP by 2015, Japan continues to spend more than it earns, with its deficit anticipated to top 7.5% by 2015.

For decades, Japan had it great. The country practically invented export-led growth, which propelled a remarkable creation of wealth that was dubbed the "Japanese miracle," by the country's leaders. Americans fretted as Japanese companies went on a buying spree, acquiring national treasures such as California's Pebble Beach golf course and the Rockefeller Center in New York. In cars, cameras and televisions, Japan's economy was on the move, quickly becoming the second-largest in the world. But the good times couldn't last. With low interest rates making lots of cheap money readily available, Japanese companies bought up all the property and stocks they could get their hands on, pushing prices into the stratosphere along the way. When the party abruptly ended, the Bank of Japan slashed interest rates and felt obliged to prop up failed banks. Since then, the Nikkei stock index has tumbled more than 80% and house prices have slumped some 70% from the peak in real terms.

With markets likely to remain volatile and news-driven for the balance of 2012, investors should adopt a more cautious stance in their investment portfolios. Solid dividend paying corporations may not seem sexy, but their remarkable combination of steady stable tax-advantaged returns and risk-reducing characteristics should make them a central feature in most investment portfolios.

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